The investment industry has generated a variety of investment solutions for improving returns to investors while reducing potential downside risks. One such solution includes strategies referred to as portable alpha solutions. A portable alpha solution is an investment technique that may combine two independent return streams. One of the return streams may be attributed to some type of market exposure (beta) and one of the return streams may be attributed to investment manager's deliberate exploitation of market inefficiency (alpha). Reference is now made to FIG. 1, which is a flow diagram illustrating conventional operations for providing a portable alpha fund. As illustrated a total portfolio return 14 may include a market return (beta) 10 and an excess return (alpha) 12. In this manner, an investor may realize gains that exceed market return by virtue of an investment manager's skills.
Reference is now made to FIG. 2, which is a flow diagram illustrating transactions corresponding to a conventional portable alpha fund. An investor 20 invests in the portable alpha fund 22. To acquire a beta return stream, the portable alpha fund 22 purchases exposure to a market index from a bank 24 or other financial institution. In exchange for receiving index returns from the bank 24, a portable alpha fund 22 pays the bank 24 an interest rate, such as the London Interbank Offered Rate (LIBOR), plus a spread, which may represent a profit source for the bank 24. The exposure to a market index purchased from the bank 24 may be leveraged such that only a fraction of the amount of exposure purchased is required for the purchase. For example, futures contracts and/or options on a market index may be purchased in lieu of or in addition to purchasing shares of an index fund. In this manner, the portable alpha fund 22 acquires a beta return stream. An alpha return stream may be acquired by the portable alpha fund 22 through a purchase of shares in a hedge fund 26. Conventional portable alpha strategies may experience limited effectiveness using conventional approaches.